Crypto tax regime in India: Does taxation on Crypto make it legal? Explained

New Delhi: Finance Minister Nirmala Sitharaman in her Budget 2022 has announced a flat 30 percent taxation on income from crypto and digital assets.

In her Budget speech on Tuesday, Finance Minister Nirmala Sitharaman said, "There has been a phenomenal increase in transactions in virtual digital assets. The magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime. Accordingly, for the taxation of virtual digital assets, I propose to provide that any income from transfer of any virtual digital asset shall be taxed at the rate of 30 percent." (Also read: Union Budget 2022: No change in Income Tax slabs, revised ITR filing window now open for 2 years from AY)

Is Cryptocurrency legal in India now?

FM’s announcement led to several people wondering as to whether the Finance Minister has indicated towards legalisation of Cryptocurrency in India. The answer is not a simple YES or NO. In her post Budget press conference, the Finance Minister had categorically said that anything to be called a “Currency” must have the sovereign backing by the Reserve Bank of India. So, she added that what we call a crypto-currency is actually a crypto-asset and not a Currency. Sitharaman further asserted that the term Crypto-currency is not a correct term. (Also read: Union Budget 2022: Five key taxation points that impacts the common man, salaried class)

Hence, to decode the FM’s statement further, we must not conclude that cryptos like Bitcoin, Ethereum, Dogecoin or Shiba Inu (popular ones) will be legal currency in India. However, since the income upon these would be taxed, the indication is that these will be legalised as Assets class and not as currency.

An IANS report, quoting industry estimates, said that there are 15 million to 20 million cryptocurrency investors in India, with total crypto holdings of around Rs 40,000 crore.

Who does cryptocurrency operate?

A cryptocurrency is a virtual or digital money that takes the form of tokens or coins. The 'crypto' in cryptocurrencies refers to complicated cryptography that allows for the creation and processing of digital currencies and their transactions across decentralised systems.

Digital currency to be rolled out by RBI in 2022-23

The Finance Minister has announced that a new digital rupee powered by blockchain technology will be issued by the RBI in 2022-23. "Introduction of a central bank digital currency will give a big boost to a digital economy. Digital currency will also lead to a more efficient and cheaper currency management system," said the Finance Minister.

Central Bank Digital Currency in India

The Central Bank Digital Currency (CBDC) is a digital form of fiat currency that can be transacted using wallets backed by the blockchain and is regulated by the central bank. CBDC is different from decentralised virtual currencies and crypto assets, which are not issued by the state and lack the 'legal tender' status. It enables the user to conduct both domestic and cross-border transactions which do not require a third party or a bank.

RBI’s serious concerns on Cryptocurrencies

At present, the government is preparing a legislation to regulate the use of cryptocurrencies in the country. It must be noted that the Reserve Bank of India (RBI) has voiced "serious concerns" around private cryptocurrencies on the grounds that these may cause financial instability.

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